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Tuesday, November 26, 2013

Bearish on iShares MSCI Philippines (EPHE)

In early
November 1991, just five months after the devastating eruption of Mount
Pinatubo, typhoon Uring struck the Eastern Visayas with heavy rains and winds
that caused Ormoc, Leyte’s capital, to be struck by a catastrophic flood like that produced in Tacloban by the tidal surge from typhoon Yolanda
(Haiyan). In the case of Uring, thousands of homes were destroyed and
4,922 people died. Deaths from Yolanda have already exceeded the fatalities
from Uring. As of November 22, the government listed over 5,600 dead and missing, about a million homes
destroyed or damaged, and damage to the majority of the area's coconut trees and wide-spread destruction of the rice crop.

Four years after Uring recovery in Ormoc was still proceeding and recovery from Yolanda will be as slow or slower because:

1. The
Philippines has the lowest percentage of paved roads when compared with
neighbors Indonesia, Malaysia, Vietnam, Thailand and Singapore, according to 2010 data. It also
had the worst scores in other key indicators such as fixed phone lines,
households with power and electricity lost in transmission. Poor infrastructure will delay rebuilding efforts.

2. The
Philippines is the country that’s most at risk to natural hazards, according to
UK-based risk analysis firm Maplecroft. The country loses $1.6 billion dollars
a year on average each year because of natural disasters, according to the
Asian Development Bank. The effects of typhoons are increased by the inability of Philippine agencies to address chronic environmental issues such as deforestation, soil erosion and water pollution are heightened by frequent typhoons.

4. Crony capitalism and corruption are endemic. Awarding contracts to non-existent contractors and fake NGO's wastes millions in government funds each year. The judicial system vulnerable to political inﬂuence and corruption. Corruption and political instability result in pessimism in investment.

5. Sectors of
Filipino industry (such as banking, telecommunications, and property
development) are almost entirely monopolized by a few elite families. In 2012, Forbes Asia announced that the collective
wealth of the 40 richest Filipino families grew $13 billion during the
2010-2011 year, to $47.4 billion--an increase of 37.9 percent. Filipino
economist Cielito Habito calculated that the increased wealth of those families
was equivalent in value to over 3/4's of the country's increase in GDP at the time. This income disparity is the highest
in Asia.

6. Overall national
poverty statistics are high; according to UNICEF 32% of children under age 5 suffer
from malnutrition, and about 60% of Filipinos die without having seen a healthcare
professional. In 2009,
annual reports found that 26.5 percent of Filipinos lived on less than $1 a day
-- a poverty rate roughly the same level as Haiti's. This leads to low domestic private investment.

7. Local government units (LGU’s)
are widely perceived as corrupt particularly by those living in other parts of
the country. (In 2012, Transparency International gave the Philippines a rank
of 105 out of 176, tied with Mali among others.) Tax revenues will drop particularly in affected areas.

8. The country suffers from low levels of investment: the Philippines' investment-to-GDP ratio currently
stands at 19.7% compared to 33% in
Indonesia and 27% in Thailand. Small and
medium enterprises (SMEs) account for roughly 99% of Filipino firms but SME's only generate 35% of GDP. The Philippine
economy is strongly dependent on remittances from millions of overseas
Filipino workers. This exacerbates skill
shortages in technical areas.